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Weekday Trader

A Billboard Co. Worth Cheering About

By

Alexander Eule

Updated July 12, 2007 11:59 p.m. ET

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DAKTRONICS AND ITS MASSIVE VIDEO scoreboards have had little trouble gaining the appreciation of sports fans.

But when it comes to investors, it's been a different story for the South Dakota-based maker of electronic advertising displays and stadium scoreboards.

Since briefly trading above $40 last December,
Daktronics
' shares have fallen 41% amid revenue shortfalls due to delayed orders. Over the last 12 months, the stock is off 15%, compared with a gain of 23% for the Standard & Poor's 500 index.

For a patient investor, however, there could be a great deal of upside in shares of Daktronics, thanks to new stadium construction and evolving billboard technology. The company enjoys a 70% share of the major stadium scoreboard business and 50% of the nascent market for digital billboards used by advertisers.

Analysts expect the company to earn $1.04 per share in 2009, according to Thomson Financial, almost doubling the 59 cents reported for fiscal 2007.

Founded in 1968 as a maker of electronic voting systems for state legislatures, Daktronics currently trades at a forward PEG ratio of 1.1, a 16% discount to the company's five-year average ratio, which computes future price-to-earnings versus EPS growth.

In 2006 construction began on $4 billion worth of arenas and stadiums, a record level of activity, according to McGraw-Hill Construction. The next highest level of construction starts for stadium and arenas was $3 billion in 1997.

Craig-Hallum Capital Group analyst Steve Dyer estimates that spending will total more than $14 billion for major college and professional sports facilities opening between now and 2010 -- a notable uptick, he says, from the past three or four years.

Additionally, the need to differentiate the stadium experience from advancing living-room technology is putting entertainment displays at the forefront of stadium plans and construction.

"They've become a part of the architecture of the stadium," Daktronics Chief Executive Officer and President Jim Morgan tells Barron's Online.

Morgan says the new major stadium projects are worth "north of $10 million," with some in the $20 million range.

At a Glance Daktronics

Stock Price:

$23.55

52-Wk High:

$40.05

52-Wk Low:

$18.31

Market Cap:

$933.5 million

Est. FY 2008 EPS*:

$0.77

FY 2008 P/E:

30.6

Est. Long-Term EPS Growth**:

27%

Est. (FY'08/FY'07) EPS Growth:

31%

Revenue (trailing 12 months):

$433 million

Dividend Yield:

0.3%

Chief Executive:

James Morgan

Headquarters:

Brookings, S.D.

* Daktronics's fiscal year ends April 26. ** Based on analyst estimates looking ahead three to five years. Sources: Yahoo! Finance, Thomson First Call, Thomson Financial/Baseline.

For its stadium opening in 2009, the Dallas Cowboys envision multiple video displays, including two that will span 180-feet in length and 50 feet in height. (Such a screen measures 2,244 diagonal inches, 53 times the size of a 42-inch plasma television.)

The 180-foot display would be Daktronics' largest to date, but Morgan says anything is possible for the company's light-emitting diode (LED) display technology. "We're only limited in size by the budget and physical constraints of the building," he says.

Alpert believes the Cowboys scoreboard project could be worth $30 to $40 million. A contract has yet to be signed, but Craig-Hallum's Dyer says Daktronics is an obvious choice and calls the project "theirs to lose."

In fact, Daktronics' leading market share makes the company the leading candidate to win most of the pending stadium projects.

According to Alpert, Daktronics has won nine of the last 14 National Football League stadium deals. Three of the other five winners have since exited the market, including
Sony
and its Jumbotron branded display. Mitsubishi, the Japanese conglomerate, is the largest remaining competitor.

Upgrade demand is also driving Daktronics' business, with operators of existing stadiums looking to keep up with the emerging high-definition standard. "We call it the 'Keeping up with the Joneses' effect," Morgan says.

And yet, even amid the promise in stadiums, Daktronics' sports division could still trail the growth in the company's commercial business.

Just 560 out of 342,000 total billboards in the U.S. are digital, according to the latest data from the Outdoor Advertising Association of America.

Despite the small numbers, the nation's two largest billboard companies,
Lamar Advertising
and
Clear Channel Outdoor Holdings,
are quickly increasing their inventory of digital displays. Lamar plans to have at least 600 such displays by the end of the year, up from 428 as of May, while Clear Channel plans to deploy 100 in 2007.

The existing digital boards already offer benefits. A recent Morgan Stanley research report suggests that Lamar's limited crop of digital boards is producing six to 12 times the revenue of static billboards.

Still, as Daktronics' lagging stock suggests, investors remain concerned about a lack of earnings visibility for the company and the inherent lumpiness in its special-project driven business.

Additionally, there's no guarantee the company will continue its dominance in winning large stadium deals, and regulatory hurdles could curtail the rollout of digital billboards.

Lamar, however, has suggested that progress is being made on the regulatory front and the Outdoor Advertising Association is promoting a study that suggests there is no relationship between the presence of digital billboards and the rate of traffic accidents.

Alpert says he purchased shares with a full understanding of Daktronics' uneven quarter-to-quarter performance and believes 90-day periods are a distraction when it comes to long-term returns.

For Alpert, Daktronics is a rare discovery among small-cap stocks. "It's very hard to find close to a monopoly business with huge demand opportunity," he says. "The only issue is some investors aren't patient enough to wait."

Such patience is likely to be rewarded. With new stadiums opening around the country, Daktronics investors eventually could be cheering louder than a stadium full of Cowboys fans.

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